Equities Grind Higher with Oil on Foreign Central Bank Stimulus Hopes

US equities joined the rally in global stock markets while Treasuries sold off across the curve on foreign central bank intervention speculation and a bounce in oil prices.  Yesterday’s dovish comments by ECB President Draghi were followed up by a story out of Tokyo that indicated the Bank of Japan is “taking a serious look” at expanding its stimulus program when it meets next week.  The BoJ’s biggest concern is falling oil prices, which are weighing heavily on the central bank’s 2% inflation target.  The strengthening yen and heavy selling of equities are also likely to be key topics of discussion.  BoJ Governor Kuroda’s credibility is on the line as inaction would imply he has run out of ammo to combat what he’s described as Japan’s “deflationary mindset”.

The supply fundamentals remain ugly, but oil prices rebounded from their recent 12-year lows, with both WTI and Brent crude trading above $31/barrel.  Oil prices have now gained about 12% in just two days as cold winter weather in the US and Europe and short covering from traders helped boost price levels.  Speaking in Davos at the World Economic Forum, Khalid al-Falih, the chairman of state owned Saudi Aramco, remained defiant about his intention to maintain production levels despite the current “unreasonable” level of prices.  The Saudis want to keep their market share despite reportedly blowing through about $100 billion in foreign exchange reserves in the past year.  Al-Falih said his country will be able to withstand depressed prices “for a long, long time”.

In the US, existing home sales rebounded 14.7%, beating consensus estimates of a 9.2% gain.  Some of the gain can be attributed to delayed closings in November stemming from the implementation of new residential mortgage rules, but unseasonably warm weather likely also helped boost real home purchase demand at year end.

Have a great weekend.